The devaluation of the Birr, a ten-fold increase in the minimum capital requirement for banks, the freezing of accounts in the State of Tigray, alterations to forex retention rules, and transaction and cash-holding restrictions—the financial sector is undergoing an eventful few years. Developments in remittance applications and the adoption of a national digital payment strategy are also movements of significant influence in the sector. The management of the National Bank of Ethiopia is also tinkering around locally developed remittance applications—one of the significant sources of forex in the Ethiopian economy—is also experiencing rollercoaster moments. In this article, EBR’s Bamlak Fekadu looks into attempts to better utilize remittance potentials by overcoming challenges.
Exporters saw a decrease in the amount of foreign exchange they are allowed to retain down to 20Pct—twice lower than the 50Pct applicable around September 2021. The move by the National Bank of Ethiopia (NBE) comes as a shock for both exporters and the banking industry which also saw a drop in its share of foreign currency earnings to just 10Pct as of January 2022. The directive is aimed at filling the huge deficit in foreign currency reserves that have been exacerbated by dwindling foreign loans and grants. Further, conflicts that raged in the North have forced creditors and grantors to reconsider loans and handouts. As such, the nation’s reserves exhibited a drop of USD465 compared to the same period last year.
To make matters worse, Tom Malinowski, US Congressman, proposed a bill in February dubbed H.R 6600 bill, a.k.a. Ethiopian Stabilization, Peace and Democracy Act. The bill considers probation of investment from the U.S. International Development Finance Corporation, immigration restrictions, loan privileges revocation, and the restriction of remittance.
If the H.R6600 bill takes effect, it has the potential to negatively strike the country’s economy especially regarding remittance as it is one of the most important sources of revenue for the government representing 6Pct of GDP. Ethiopia has obtained USD 3.6billion in remittance last fiscal year.
With the prospect of ensuring buoyant movement and the boosting of remittance inflows, NBE has kicked off the implementation of the National Digital Payment Strategy (NDPS) last year in July, with the support of the United Nations Capital Development Fund (UNCDF). NDPS maps out a three-year action plan to develop a reliable, inclusive, and interoperable infrastructure; build a consistent regulatory oversight framework; and create an enabling environment for innovation. The central bank has prioritized attaining efficient ATM and POS interoperability, vitalizing digital retail payment systems, strengthening consumer protection and cyber security, and digitizing government and state-owned-enterprise payment modalities.
Further, NDPS aims to cut remittance costs and help households better manage costs, through the digitization of the payment system. The strategy considers terminating international remittances in bank accounts, hoping it can have a meaningfully positive impact on the flow of foreign currency into Ethiopia.
The central bank has also lifted the suspension of remittance transferring platforms that was imposed for three months. In early March, NBE’s Foreign Exchange Monitoring & Reserve Management Directorate ordered digital remittance platforms working with the Bank of Abyssinia (BoA) to cease operations, compelling the bank to cease using CashGo and Mama Pays platforms for remittance services. It also summoned BoA to clarify the legality of the app-based remittance operations and what distinguishes them from traditional money transfer services. Regulators at the central bank claimed neither the 25-year-old bank nor the tech firms hold valid permits to offer remittance services through the app.
The requirement is outlined in a directive issued last year, which defines representatives as banks, the postal service, payment instrument issuers or other financial institutions granted the status by the central bank. A ‘representative’ can only engage in remittance services by partnering with a fintech company holding an international remittance service provider license, which usually are claimed to charge high cost of sending remittance. These two fintech companies found a loophole in which to operate in, causing NBE’s action of ordering a cease and desist order.
However, upon the direction of the Prime Minister’s Office, NBE lifted this restriction and the two fintechs and BoA are permitted to go ahead.
“If your eyes are open, you’ll see things worth seeing,” Bersufekad Getachew, co-founder of CashGo, wrote in content with the decision to lift the suspension.
The app has been integrated with Visa and Mastercard, allowing people abroad to transfer funds directly deposited in Birr to BoA accounts along cash-pick up options for non-account holders. It also offers a donation and fundraising feature similar to GoFundMe. The app has been active for more than six months, and offers service charges as low as 1.5Pct, in contrast to major money transfer operators (MTOs) which charge as high as 15Pct through wired and electronic services.
Another fintech which recently entered the remittance game is TapTap Send, which offers mobile money transfers to telebirr, Amole, and HelloCash as well as bank transfers to Commercial Bank of Ethiopia and Dashen Bank. The company claims to only charge a small percentage on the exchange rate and with no extra fees.
According to the World Bank’s Remittance Prices Worldwide (RPW) report of 2021 exhibited that sub-Sahara Africa remains the most expensive region to send money to at an average of 8.02Pct while commercial banks remain the most expensive forms, with an average cost of 10.66Pct. South Asia remains the lowest cost receiving region, with an average cost of 4.64Pct.
“The transfer application CashGo entertains around USD1.5 million monthly transfers from the diaspora community free of service fee, “Bersufekad said while remitters from the U.S remain top followed by senders from Europe. The co-Founder of the app believes that the platform has the potential to make the foreign currency inflow more sustainable compared to smaller operators.
Fikadu Digafe, Vice Governor and Chief Economist of NBE, appreciates how convenient and cheap the apps are, yet demanded clarification on whether they are allowed or capable of pulling person to person remittance from abroad. “The central bank is also attempting to harmonize the platforms under a legal framework,” he told EBR.
Dominant MTOs like MoneyGram and Western Union charge as high as 10 and 11Pct, respectively, from every remittance. The former controls 24Pct of the remittance market while the latter enjoys 33Pct. Both work with banks only.
The World Bank’s RPW suggests debit/ credit cards as the cheapest instrument to fund remittance transactions at a 4.68Pct followed by mobile money with 5.68Pct. Costs for non-digital services are consistently higher than those using digital methods, regardless of the region where the money is being sent to. Further, post offices are the most expensive at 8.7Pct, MTOs at 5.43pct, and mobile money operators the cheapest RSP type recorded with 3.12Pct. However, mobile operators only account for a very small share—less than 1pct of the sample size.
In traditional remittance services, banks serve as agents to service providers registered. The central bank follows a closed capital account policy to maintain the stability of the economy in view of the serious foreign exchange shortage in the country. It is illegal to send money out of Ethiopia unless for specific reasons that are tracked by NBE. Remittances must always be paid out in Birr when received as cash, although they can be held locally in foreign currency accounts subject to balance limitations.
Over the years, the flow of remittance through informal channels has grown tremendously to cover close to 50Pct in FY2020, according to NBE, up from 39Pct a decade ago.
“The widening of gap between official and parallel market rates has encouraged many people to avoid formal channels for money transfers,” said Abdulmenan Hamza, a London-based Accounts Manager, as he recognizes the gap is mainly caused by forex shortages coupled with the inflationary environment. Lowering this gap using conservative monetary policy and rationalizing the use of forex could lower the gap, which encourages people to use the formal channel.
However, banks and fintech firms rush to avail digital remittance platforms, positioning themselves to boost inflow by significantly cutting transfer fees. Yet, the majority of private banks have no international gateways useful for e-commerce and remittances purposes.
The expensiveness to acquire international gateways requires millions of dollars in investment. For instance, foreign tech firms request USD50,000 for a integration with a bank.
NDPS was followed by two directives which surfaced with hopes of governing payment instrument issuers licensing as well as the operation of payments. The latter will allow foreign nationals of Ethiopian origin to invest only in foreign currency. Resultantly, the central bank received a dozen applications from private fin tech solutions including the aforementioned TapTap Send, CashGo, and Mama Pay as well as ArifPay, ChapaPay, SantimPay, and UniCash. Some of these are composed of foreign shareholders. The state-owned Ethio Telecom also has been awarded a license for its TeleBirr mobile money service and has attained transacted remittance transfers of USD300,000 since introducing the feature a few months ago.
The advent and strong competition of technology-enabled remittance players is forcing banks’ hands. Lottery programs have thus become trendy with banks trying to lure customers to remit foreign exchange through them. The trend was started by CBE 11 years ago with several others following suit.
According to the European Union Commission’s research in 2020 regarding Covid-19 and remittances in 33 African countries, a quarter of the continent’s population depend on remittances to some extent. The countries with the greatest proportions of people report being dependent on remittances are Gambia with 47Pct, Lesotho at 38pct, and Cabo Verde with 31pct.
In 2020, Somalia registered the highest value of personal remittances received in Africa in terms of gross domestic product (GDP) covering around 35pct of the country’s GDP. South Sudan and Lesotho followed with 29.5Pct and 20.6Pct, respectively.
According to the Population Division of the UN Department of Economic and Social Affairs estimation, Ethiopia receives USD5 to 6 billion yearly, largely from its 1.3 million diaspora members in the US, Europe, and the Middle East. Private individual transfers, including remittances, are the single most important source of foreign exchange for Ethiopia, covering 35Pct of imports and is almost three times goods exports. Ethiopia’s total foreign exchange demand exceeds USD 17 billion. EBR
10th Year •June 2022 • No. 108